If you want to know about calculating the cost of goods manufactured, then this article is for you.
Many people call it the cost of goods completedIt is a process or formula to measure the inventory’s total value produced by a company.
The best time to calculate it is when the inventory is ready for the sale process. In simple words, it is the total expenses incurred to focus on the inventory and then turning it into finished goods.
What is the cost of goods manufactured
It is a formula or method that helps you determine different types of costs. You can use the method to incur your company’s costs over time. Therefore, it produces a certain mix as well as the quantity of goods. The structure of the cost include:
- The cost of direct labor that you use in the process of Manufacturing during the period.
- The cost of direct material that you use in the process of Manufacturing during the period.
- The amount of company overhead that you allocated to the goods manufacturing process during the period.
Remember, a retail operation does not have any cost of goods manufactured. The reason is that it sells them. Also, since the retail does not produce the goods, they don’t need such an important aspect. It is only for manufacturing companies.
It is very different from the cost of goods sold. The manufactured goods will remain in your stock for a few months. In particular, they will stay in the stock if your business experiences seasonal sales.
On the other hand, when you have sold good to other companies or businesses, it will have a different value. There are several reasons for the cost of goods manufactured that differentiate it from the cost of goods sold.
What’s the difference
You may have no sales during the period, but you continue the product. In this regard, the cost of goods sold is zero. On the other hand, the manufacturing cost is very high.
Similarly, you may have many sales during a period of two months from your inventoried reserves. Also, you may have no manufacturing process going on at all. In such a situation, the cost of goods sold is very high than the manufacturing costs, which in this case is zero.
So much so, the cost of goods sold will contain charges to obsolete inventory. The primary reason behind this is the fluctuations in sales. The likely reason for the main difference between these two is that the mix of products that you have sold won’t match the mix of products that you have manufactured.
The Importance of Cost of Goods Manufactured
It is an equation used for an inventory calculation. The process involves you to add the total cost of the manufactured goods, which include direct labor, materials, and factory overhead.
Then, you will work in process inventory and deduct the ending goods in that particular process. The formula allows you to adequately make calculations after completing the cost of good during the period.
Besides, it is the cost of goods that get completed and equal to the inventory amount. For example, the inventory that you transfer from the goods into finished goods. The process occurs at the end of the period. So, the total cost of goods manufactured is an essential aspect of the goods that you have sold.
Calculating the cost – General Considerations
Knowing all aspects of your business is important for the prosperity of the company. It means when you understand the amount you made, sold, lost, and manufactured, it will benefit you in many ways.
Compared to retailers, manufacturing companies have unique categories for inventory. For example, these include raw materials, work in progress, as well as finished goods. All these aspects contribute significantly to the calculation. It is an important metric that allows you to understand the status of your company.
So, when you want to make the calculations, it is important to add direct labor, direct materials, and manufacturing overhead. This way, you will get the total manufacturing costs.
Besides, you will add the starting work in process as well as subtract the ending process. Make sure you subtract the amount from the total cost. Thus, you will get the cost of goods manufactured easily.
Some businessmen think that is an easy process. Although it seems simple, it is not that easy. You have to work on all parts and add them in the equation. The cost of goods manufactured schedule is an excellent method to simplify the process. It is a method that reports the costs for the period, which you added to the work-in-process.
Moreover, you can use this method to adjust the costs for the work-in-process inventory. It enables you to approach the cost of good manufactured easily. So, the formula is:
Cost of good manufactured = Beginning work-in-process + total cost of Manufacturing – ending work in process.
Creating a schedule for the cost of goods manufactured
It is quite easy to create a schedule for the cost of good manufactured. Consider the following table that will give you a clear idea about the entire process. Continue reading!
|Direct Materials||(Starting Raw Materials added to Purchases and subtracted the Ending Raw Materials)|
|Add Direct Labor Costs|
|Add Manufacturing Overhead|
|Equal to Total Manufacturing Cost||(Direct Labor added to Direct Materials and then added to Manufacturing)|
|Now add the Beginning in Process Inventory|
|Subtract the Ending WIP Inventory|
|Equals to the Cost of Goods Manufactured||(Total Manufacturing Cost + Beginning work-in-process – Ending work-in-process)|
Example of Cost of Goods manufactured
If you do not understand the process, then let us clarify it with an example. If you have a company that manufacture goods, let’s say steel, then assume you had $200,000 of inventory initially. Now, you spend $100,000 on materials required in the offices. Also, you spent $150,000 on the salaries of your employees. Then, you spend $50,000 on rent and other utilities.
When you calculated the equivalent units of product, you found a $100,000 in process inventory. So, you can calculate the total cost by adding $200,000, $100,000, and $150,000. Once done, you will get a total of $450,000.
Now, you have to subtract the $100,000 from this number. Doing so will give you a total cost of good manufactured, which is $300,000. It means that your company could manage to finish the goods worth of $300,000 during the period.
The cost of goods manufactured is of great importance for your manufacturing business. When you have a clear idea of your company and what it is Manufacturing, you can analyze everything easily. It includes each aspect in the cost of goods manufactured formula.
Likewise, you can make adjustments to maximize the net income of the company. In general, it gives your business a lot of important information, including the elements of cost.
So much so, it contributes to your overall business vision and planning. The formula or method enables you to make plans for your company and then modify the plan as per your needs.
For example, you can set the pricing strategy for your products. Using this method, you can make accurate comparisons of operations from one year to another. Furthermore, it enables you to plan for resources, their usage, and volume of goods produced during each period.